- Market still pricing in two rate cuts this year
- Bank rate setting committee becomes slightly more hawkish with an 8-1 split
- Consumers and business should get used to rates around this level
Laith Khalaf, head of investment analysis at AJ Bell, comments:
“The Bank’s rate setters have a lot of flux and uncertainty to deal with, so sitting on their hands is probably the best course of action for now. Domestically, April’s National Insurance hike may have implications for inflation, employment and growth, and the shifting global political and economic picture stemming from Donald Trump’s short time in office lends a further element of instability.
“According to Refinitiv data, the market is still pricing in two rate cuts by the end of this year, but clearly the unpredictable economic situation raises risks to that prognosis, in both directions. We now have seven weeks until the next interest rate decision, which right now feels like a yawning gulf for significant developments to pour into.
“The Bank expects inflation to rise towards a peak in the third quarter of this year, so they may want to get an interest rate cut in before it starts to climb to an embarrassing level. A rate cut won’t have its full effect until 12 to 18 months after the decision, but it’s easier to justify loosening policy when CPI inflation is nearer to 3% than 4%.
“The rate-setting committee as a whole became moderately more hawkish this time around, with an 8-1 split in favour or maintaining rates, compared to 7-2 last time. Catherine Mann was the dove who has seen enough to shift from wanting a rate cut to 4.25% to vote for staying the course at 4.5%.
“All of this probably means UK consumers and businesses better get used to rates being at or around this level. As far as we can tell any future rate changes are likely to be in a downward direction, but they will be gradual, barring an economic shock which requires the Bank to step in and stimulate the economy.”
